Today on Silicon Valley Watcher Tom Foremski writes about The Dirty Little Secret of Silicon Valley's Startup Boom.
Thousands of startups are being launched with dreams of making a difference in the world. Yet Angels and VCs are selling them off to the big corporations in what are essentially engineering talent acquisitions.
Foremski's article seems to have been prompted by the Amazon acquisiton of Seattle's TeachStreet earlier this week. The e-commerce giant purchased the 5-year-old online marketplace that matches students and teachers and will be shutting it down the service in less than two weeks.
Just one $25 million payday from the sale of a startup will more than cover an Angel investor’s loss from a hundred dud $25K investments — which is a loss of just $2.5 million. The risk to reward ratios are off the charts, which is why so many want to be Angels.
And there’s no shortage of startups looking for seed investments. They are told that they must have a business plan, they must address market opportunities of at least $1 billion in revenues; industry sector expertise is important; do the team members have prior experience? Are there enough tech leads in the team?
We are repeatedly told that these, and many other factors, are important to investors. But aren’t most of those “factors” BS? The plan is to sell these tiny businesses to larger companies in the shortest time possible.
But in the vast majority of cases, the buyers aren’t interested in the startup’s business, they are acquired for their engineering talent alone.
This happens time and time again. Startup teams can go from seed to exit in under a year. Mark Zuckerberg has said it many times, Facebook acquires companies mostly for their talent.
Canada seems to be a talent target in particular. Most recently Vancouver's Summify was acquired by Twitter and their popular service will be shutting down soon. And how many of these examples from 2011 follow the same pattern?
Perhaps the best advice for young entrepreneurs is to produce some great code, create and launch a service, then shop it around as a demonstration of your talent.
Start with the accelerators and incubators as they have the contacts at Google, Facebook, and Twitter. And they know how to sell startups.